Revamping fund would retain dividends, help close state's fiscal gap

Posted: Tuesday, October 15, 2002

Revamping the Alaska Permanent Fund along the lines proposed by fund trustees and now endorsed by both leading candidates for governor would be a good first step toward resolving the state's fiscal problems.

A second and equally important step would be returning the permanent fund to the purpose for which it was established and using at least a portion of the fund's earnings for their original mission -- helping pay the cost of state government.

The proposed approach would require revamping the fund as an endowment along the lines of educational funds at Harvard University and other major institutions. That would allow earnings to be calculated on the full value of the fund rather than just the total in the earnings reserve account.

The problem with the existing system is that money only goes into the earnings reserve when investments are cashed in. But much of the value of the fund is in investments that are still growing and should be held, not sold.

The fund is managed to earn 8 percent per year, a return it tends to achieve overall despite short-term market fluctuations. As we have suggested before, retaining 3 percent each year for fund growth and inflation-proofing would free up 5 percent for public use.

If that 5 percent were split between dividends and state expenses, in 2005 it would provide $625 million for each purpose. That would go a long way toward closing the fiscal gap and individual dividends would be more than now projected under the existing system. Both dividends and state funding would grow as the fund's earnings grow.

Conventional political wisdom holds that the people of Alaska will not allow changes to the dividend program. That appears to be true, but is based on previous attempts to dip into fund earnings, attempts that most voters saw as clumsy, unjustified and ill-timed.

It may be possible to increase state revenues by growing the economy, as Frank Murkowski proposes, and further cuts may be possible in the state budget. But there is a very real likelihood that Alaskans will eventually be faced with either using part of the permanent fund for its intended purpose or losing a chunk of their personal income through taxes.

Former Gov. Jay Hammond says he would rather see the state pay high dividends and take the money back through taxes. We consider that a nonsensical notion that should be emphatically rejected.

Modifying the system along the lines described here would solve two problems. It would keep the dividends flowing while freeing up hundreds of millions in fund earnings to pay state expenses.